Mutual Misunderstanding Nullifies Contract

Courts will not enforce a contract where there is no “meeting of the minds” between the parties on a material term of the agreement. There is no contract where one party reasonably understands a contract term to mean one thing and the other party reasonably understands it differently.

In Gessin Electrical Contractors, Inc. v. 95 Wall Associates, LLC, the contractor and the owner had a different understanding of the material terms of their agreement.

Background

Gessin Electrical Contractors, Inc., a subcontractor, brought a claim for approximately $1.7 million in change orders against the project owner, 95 Wall Associates, LLC. The parties agreed to resolve the dispute by having the owner pay the subcontractor $500,000. A settlement agreement was drafted and signed by both the owner and subcontractor.

At the time that the settlement agreement was entered into, the owner did not realize that approximately $1.1 million of the subcontractor’s claim had already been satisfied by payments from the general contractor to the subcontractor. Therefore, while the owner thought it was settling the full $1.7 million claim for $500,000, the contractor thought it was settling a $580,000 balance for $500,000. The parties were not represented by counsel at the settlement meeting.

Only after the owner had paid the first $450,000 required under the settlement agreement did the owner realize that about $1.09 million of the subcontractor’s claim had already been satisfied by payments from the general contractor. The owner then refused to make any further payments under the settlement agreement and made an overpayment claim against the subcontractor. The subcontractor sued to enforce the settlement agreement and the owner counterclaimed on account of the overpayment. Both parties moved for summary judgment.

The motion court found that there was no “meeting of the minds” between the parties, and declared the settlement agreement null and void. The subcontractor appealed.

Decision

The appellate court affirmed the lower court’s decision. According to the court, the ultimate aim in interpreting an agreement is to realize the parties’ reasonable expectations through a practical interpretation of the contract language. Even if parties intend to be bound by a contract, it is unenforceable if there is no meeting of the minds, i.e., if the parties understand the contract’s material terms differently. Additionally, the court noted that a contract can be rescinded if the failure to do so would unjustly enrich one party at the other’s expense, and the parties can be returned to the status quo ante without prejudice.

Since the court found that the parties did not have a meeting of the minds with respect to the payment terms of the agreement, and the enforcement of the agreement would have unjustly enriched the subcontractor, the appellate court held that the settlement agreement should be rescinded, restoring the parties to the status quo ante.

Comment

A “meeting of the minds” is essential to the enforcement of a contract. As shown in this case, even if parties intend to be bound by a contract, it may still be unenforceable if there is a mutual misunderstanding about a material term. Here, the parties’ agreement did not reflect either party’s understanding. The contract will be held unenforceable only if there is a reasonable basis for the parties’ difference of opinion as to what the contract included or did not include. A party, however, may not create ambiguity in otherwise clear language simply by urging a different interpretation or understanding of the contract wording. The prudent contractor should make every effort to ensure that clear and unequivocal wording exists in its written agreements.

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